J.P. Morgan Chase JPM Chairman and Chief Executive Officer James Dimon had just committed the most expensive blunder of his 30-year career, failing to detect the risk of trades that had begun to generate huge losses at the bank.

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Those trading positions have produced losses that could total as much as $5 billion, tarnishing the record of an executive who had thrived through the global financial crisis and who has long been known for paying close attention to the bank's trading activity, its risk profile and the activities of its senior employees.

J.P. Morgan, the nation's largest financial firm by assets, is struggling to contain the damage, which already has shaved off more than $25 billion in shareholder value.

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The debacle has raised broad questions on Wall Street and in Washington about whether any executive can properly oversee such a large financial institution, whether new regulatory rules will do anything to prevent another financial crisis and whether tougher regulation is needed to further rein in risky bank trading, particularly at financial behemoths that are viewed as too big to fail.

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Blessed by Mr. Dimon, the activity originally was designed to provide an economic hedge for the bank's other holdings, executives say. It expanded, particularly after J.P. Morgan in 2008 bought troubled lender Washington Mutual, which held riskier securities and assets that required hedging.

In recent years, some of the group's trading morphed into what essentially amounted to big directional bets, and its profits and clout grew. Last year, Mr. Macris dropped risk-control caps that had required traders to exit positions when their losses exceeded $20 million. Ms. Drew and Mr. Macris declined to comment.

Mr. Dimon was unaware of the risk-control change, according to colleagues. Indeed, he had appeared to have started paying less attention to details of the group's trading activities amid the hefty profits, colleagues say.

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But losses--roughly $100 million or more a day--soon began showing up on the CIO books, J.P. Morgan officials say. Mr. Dimon, who saw himself as a shrewd risk and financial manager, was angry at himself for failing to detect the group's exposure--and at the group for taking it on, colleagues say.

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"The last thing I told the market--that it was a tempest in a teapot--was dead wrong," Mr. Dimon said, according to an official. "It's better to just tell the world what has happened, as far as we know."